HSH Nordbank generates pre-tax profit of € 222 million in the first half

Banking, Finance, News, Reports, Shipfinance — By on August 28, 2015 at 9:40 AM


Constantin von Oesterreich,

Constantin von Oesterreich,


• Total income of € 652 (646) million
• New business up to € 4.9 (4.5) billion
• Cost-income ratio improved to 44% (48%)
• No new debt waiver in Q2; bank levy a burden
• Like 2014, figures for 2015 forecast to be in the black
• Solid Common Equity Tier 1 capital ratio of 12.4%
• In-depth talks with EU Commission ongoing

HAMBURG/KIEL HSH Nordbank again achieved progress in terms of operating profit in the first half of 2015, having resolutely reduced its costs further and having reported, with a pre-tax profit of € 222 (432) million, a result well into the black despite significantly less reversals with effect on income due to the debt waiver of its main shareholders.

The Bank is thus well on its way to completing its second year in succession in profit as
planned despite heavy premium charges. However, the legacy shipping loan portfolio continues
to weigh heavily on the Bank and again made extensive valuation allowances unavoidable
in the first half of 2015. The debt waiver of its guarantors Hamburg and SchleswigHolstein
almost halved to € 289 (573) million and thus contributed € 284 million less to
earnings than was still the case in the first half of the previous year. The guarantee fees rose
to € -468 (-358) million in the first half, of which a basic premium of € 235 million alone. In
total, HSH Nordbank has meanwhile paid € 2.5 billion in cash to its guarantors Hamburg
and Schleswig-Holstein since 2009.

Total income stabilised encouragingly with a figure of € 652 (646) million. This involved net
interest income increasing strongly to € 448 (231) million compared to the same period in
the previous year. The Core Bank’s new business, which generated stable margins especially
with real estate and corporate clients, exerted a substantially positive effect on income.
HSH Nordbank furthermore again achieved evident successes in winding down risky legacy
assets. Administrative expenses once again reflected the savings made as result of the ongoing
cost reduction programme. The already fully absorbed annual premiums for the Europe an bank levy and the deposit guarantee system of the savings banks incurred charges totalling € -54 million, of which as much as € -44 million was charged to the Core Bank. At Group level, this therefore left pre-tax profit totalling € 222 (432) million; after taxes the result came to € 147 (301) million.

Meanwhile, the talks ensuing from the ongoing state aid proceedings – primarily between
the majority shareholders in HSH Nordbank, i.e. Hamburg and Schleswig Holstein, as well
as the EU Commission – continue unabated. This dialogue is in-depth and constructive. The
target is to reach a general agreement with the shareholding federal states by the autumn of

“Our nearly 2, 500 employees are working hard and with dedication; that is the basis for
HSH Nordbank’s success in its day-to-day business. However, our Bank has to overcome
more than the tough competition and the difficult market conditions. To this day, HSH
Nordbank’s suffers from the serious omissions and poor decisions of the past. Its current
management continues to work resolutely on addressing these mistakes. That is a painful
way to go, but it is the only right one. Particularly with a view to the billions in ship loans we
now need substantial relief for our balance sheet, which is the case that our shareholders
Hamburg and Schleswig-Holstein are making in the talks with the EU Commission, ” said
Constantin von Oesterreich, Chairman of the Management Board of HSH Nordbank.

Strong net interest income – target-beating drop in administrative

Total income was up to € 652 (646) million at the half-year mark. Net interest income,
which performed well by nearly doubling to € 448 (231) million thanks to the encouraging
trend in new business and the absence of adverse exceptional factors from the previous year,
made the largest contribution. The ongoing, strategic downsizing of the Restructuring Unit
and loan repayments in the Core Bank trimmed net interest income as expected.

Net commission income totalled € 62 (73) million in the first half. The Core Bank was in this
respect up by six percent to € 54 (51) million. Loan commissions related to the expansion of
new business were the primary factor underpinning this result. In addition, it positively
reflected improved cross-selling of products and services beyond loan finance. In so doing,
HSH Nordbank visibly expanded its position in the newly set-up Transaction Banking. The
restructuring of legacy loans also contributed to net commission income with a figure of
€ 8 (22) million, albeit to a significantly lesser extent than in the previous year. Net trading
income, which is based exclusively on client transactions, amounted to € 78 (112) million,
having been affected by valuation effects in connection with the volatility on the financial
and foreign exchange markets. The net investment income of € 56 million was well below
the previous year’s € 240 million, the earlier result having benefited substantially from
market-related impairment reversals and capital gains.

Thanks to its cost reduction programme, the Bank reduced administrative expenses by more
than budgeted to € -302 (-338) million. The number of employees was down by 110 from the
2014 yearend to 2, 469 full-time staff, which lowered personnel expenses to € -141 (-146)
million. The Bank plans to scale administrative expenses down to € 500 million per year by
2018 in order to achieve a sustainably competitive cost base. To date and according to the
reconciliation of interests concluded with the works council in the second quarter, agreement
on individual solutions has been reached for about 40 percent of the targeted job
shedding. The cost-income ratio improved further to 44 percent from 48 percent in the
same period of the previous year. Overall, the costs to meet regulatory requirements again
rose substantially – as in the whole sector.

Margins in client business largely stable
The Core Bank, in which the strategic business divisions of HSH Nordbank are pooled, generated
pre-tax earnings of the € 157 (185) million in the first half of the year. Unlike in the
previous year, this figure already includes the portions pertaining to the Core Bank of the
bank levy of € 30 million to be paid for the first time as well as the deposit guarantee of the
Savings Banks Finance Group in the amount of € 14 million for the year 2015 as a whole.

With a nine-percent increase to € 4.9 (4.5) billion, the generally favourable trend in new
business exerted a positive effect on the Core Bank’s result. The proportion of new loans
disbursed also rose within the year, whereby the Core Bank’s total assets rose to € 77 billion
(31.12.2014: € 76 billion). The stronger US dollar also boosted the total asset figure. The
interest margins generated were largely stable despite the demanding competitive setting.

At the same time, the risk situation involving business with real estate and corporate clients
as well as finance for energy and infrastructure projects remained inconspicuous. The Core
Bank’s operating earnings stripped of all guarantee and exceptional factors as well as legacy
assets rose to € 268 (236) million and show that the business model – when freed from
legacy assets – is heading in the right direction.

As an in-demand partner for real estate finance throughout Germany, HSH Nordbank increased
its new business most strongly in this particular sector. The Bank thus generated a
20 percent gain to € 2.9 (2.3) billion in the first half. In line with the selective approach
taken, new business in ship finance remained steady at an unchanged € 0.7 (0.7) billion. By
contrast, the Corporate Clients division was, with a figure of € 1.3 billion, down slightly from
the previous year’s € 1.5 billion even though demand from corporate clients for loans picked
up considerably in the second quarter. In business involving finance for energy and infra-
structure projects, which was recently pooled within the Corporate Clients division, the
focus was on new business in Germany as well as other European countries.

Charges arising from legacy business in ship finance, on-schedule and early loan repayments
as well as on the whole negative valuation effects again offset the generally solid earnings
performance. There were, furthermore, the expenses – born mostly by the Core Bank – pertaining
to the European bank levy in the amount of € -40 million and the deposit guarantee
system of the savings banks in the amount of € -14 million.

Loan loss provisioning dominated by legacy exposures in the shipping portfolio

The loan loss provisioning in the first half reflected increased allocations for completed and
planned restructuring in the legacy ship loan portfolio. On the other hand, there were significant
net reversals involving real estate and corporate loans, which was attributable to improved
risk assessments and loan repayments.

A compensating effect of the guarantee in the amount of € 319 million offset the virtually
unchanged net loan loss provisioning of € -199 (-195) million. This stems from the € 263
million balance of the gross compensation amount for the guaranteed portfolio and the
forex result, less the additional premium of € -233 million plus € 289 million due to the
capital protection clause, which were incurred exclusively in the first quarter. Overall, after
the offsetting effects of the guarantee, there remains a positive balance of loan loss provisioning
of € 120 million, which, in view of a significantly smaller debt waiver, is significantly
below the previous year’s level of € 337 million.

HSH Nordbank resolutely reduced the legacy portfolios pooled in the Restructuring Unit
during the first half of the year. The disposal of non-strategic loan and securities positions
took the segment assets down significantly to € 27 billion (31.12.2014: € 31 billion) despite
opposing effects from the appreciation of the US dollar.

Common Equity Tier 1 ratio at a solid level – no debt waiver in Q2
The capital ratios reported at the end of the first half of 2015 remained at a solid level. For
instance, the Common Equity Tier 1 ratio (CET1) in accordance with the Basel III (phased
in) transition rules stood at 12.4 percent (including a buffer of 2.4 percentage points due to
the capital protection clause). The CET1 ratio of HSH Nordbank came to a solid figure of
11.5 percent (contains a buffer of 1.5 percentage points) also on the assumption of complete
(fully loaded) implementation of the Basel III rules. There was no further reversal with effect
on income from the debt waiver in the context of the capital protection clause in the
second quarter. At the half-year mark the € 289 million debt waiver was significantly below
the previous year’s figure of € 573 million, which was the primary reason for the earnings
before taxes of € 222 million falling well below the previous year’s high € 432 million.

The slightly, 0.2 percentage point lower buffer in the CET1 ratio compared to 31 December
2014 is attributable mainly to the planned, slight increase in risk-weighted assets to € 39.9
billion (31.12.2014: € 39.5 billion). This was due to the appreciation in the US dollar
(€/USD 1.12 as at 30 June 2015 versus €/USD 1.21 as at 31 December 2014) and to the
planned expansion of the new business.

Earnings after taxes came to € 147 (301) million. Tax expenses from current and deferred
taxes amounted to € -75 million in the first half, thus putting the rate at 34 percent. Adjustment
was made for further additional legacy tax assets dating back many years. This included
the outcome from audits starting in 2003 as well as the agreement in principle with the
authorities on an investment in Luxembourg disposed of in 2011.

Outlook: Core Bank to make further gains – Consolidated profit again in 2015

The business model of HSH Nordbank has proven itself in the market in the past few years.
The Core Bank is forecast to generate considerably improved pre-tax earnings for the year as
a whole. The Restructuring Unit is to be expected to report a significant pre-tax loss due to
the planned decrease in relief from the debt waiver and the further, stepped-up portfolio
wind-down. Overall, at Group level, the forecast is therefore once again a pre-tax profit for
fiscal 2015 as a whole, albeit an amount well below the previous year’s high amount of € 278

“This Bank has made good progress in the past few years thanks to dependable work,
strength of purpose and the confidence of its clients. We will continue to pursue this path
and make HSH Nordbank, with its appreciably established business model, a lastingly profitable
regional bank. We will also continue to resolutely address the mistakes of the past and
simultaneously take the right, though sometimes also unpopular, strategic decisions for the
future. With a view to the ongoing state aid proceedings in Brussels we believe that our
shareholders will soon reach a decision with the EU Commission, ” said Chairman of the
Management Board Constantin von Oesterreich.



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